TIP: Avoid Audit Angst
Tip of the Month
TIP: Avoid Audit Angst
- Organize all receipts and include notes regarding travel and entertainment expenses (the "who, what, where, when" and a short explanation of the purpose of meeting, etc.). Keep personal and business expenses separate, and remember that IRS auditors are always on the look-out for potential abuse of expense deductions. A small business owner has the right to take every deduction that the law allows, but the IRS has the right to require documented back-up for deductions taken. Good record keeping is essential.
- Report all income. The IRS is intent on finding unreported income and small businesses that rely on cash transactions are a frequent target for scrutiny. Agents will look at industry studies and averages to identify filers whose reported income appears suspiciously low. Remember that it is also relatively easy for the IRS to track down and check whether businesses have reported all the income listed on the various 1099s issued to them by their clients.
- Operate like a business. It may sound self-evident but it is worth repeating that then IRS will disallow business expenses if it determines that the filer is a hobbyist rather than a business operator. Generally, the IRS gives new start-ups a three-year grace period in which to turn a profit, but it will disallow losses if the enterprise appears to be a hobby. In order to demonstrate a profit motive, a business owner must deploy "usual" business methods - i.e. maintaining financial records, operating a specific business bank account for income and expenses, and having a formal set of books.
- Get professional assistance. Frequent changes in tax law make it likely that business owners who prepare their own filings will inadvertently make errors that attract further IRS attention. A carefully prepared return that follows IRS models is much less likely to attract attention. The IRS has more confidence in a professionally prepared return knowing that the books have been reviewed by another pair of eyes and that the tax advisor has their professional reputation on the line.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.